Pharma Industry Financial Analysis

Abstract

This document contains supporting data for the presentation on Financial Statement Analysis for Dr.Reddy’s and Cipla for financial years 2010-11 and 2011-12. The team used publicly available annual financial statements from the respective company’s websites.

Introduction

The team picked two Indian pharmaceutical companies based on their market capital and presence in the global market. Dr.Reddy’s incorporated in 1985 and had phenomenal success in making generic drugs. Dr.Reddy’s has presence in many global markets including USA, Europe, Russia and Japan. Cipla is one of the oldest pharmaceutical companies in India. Cipla pioneered bulk production of generic drugs and export to many countries. Cipla research and development had breakthrough in slashing prices of critical generic drugs for treating HIV and Cancer patients.

The team had picked 2010-11 and 2011-12 financial years for the analysis. Due to change in financial statement formats, we could not include 2009-10 statements.

Financial Statement Analysis

Dr. Reddy’s

Common Size Balance Sheet

clip image0032

clip image0053

Common Size Income Statement

Cash Flow Summary

CIPLA

Common Size Balance Sheet

clip image0113

clip image0132

Common Size Income Statement

Cash Flow Summary

Key Financial Ratios

Dr.Reddy’s

Cipla

Recommendation for Dr Reddy’s

• No, from the market ratios, the PE ratio has fallen down, in 2011 the market was willing to pay 28 times the eps and in 2012 it came down to 25. It means the growth of the company from investors point of view is not very good.

• No, from long term solvency ratios, it is running high risk with debt ratios above 0.5 and debt-equity ratios above 2, this company’s financial growth is more from the borrowers money, so its not completely safe to invest over the long run. As a shareholder, if these ratios are deteriorating, then their assets and equity are not sufficient to fund the total liabilities.

• No, from short term solvency ratios, the current ratio is recorded < 1.5 (1.14 in 2011) and when this is correlated with the average collection period (88 in 2011 to 83 in 2011), it shows that if the trade receivables are delayed over the average collection period, then the company has to liquidate its current assets against trade payables. Dr. Reddy must reduce it short term borrowings and at the same time it should be able to reduce its average collection period.

• NOTE: However from the annual report numbers, the company claims, it looks like it has good trust in the market which is earning good profits from the borrowed money and stock is upword.

What is the degree of risk inherent in the investment?

In 2011&2012, more than 50% (Debt Ratios) of company’s assets are financed through debt. D-E ratios are also high which tells us that the company is running high financial risk.

Should existing investment holdings be liquidated?

In 2011, the current ratio was very close to 1 (1.14), considering avg account receivables close to 3 months, it ran the CA to CL neck to neck. Any more delay in TRs would make the company to sell off its assets against TPs. In 2012 it is good.

Recommendation for CIPLA

• Yes, from the market ratios, PE ratio is increased from 26 to 28 which shows the market is willing to pay even more over 2011.

• Yes, from the long term solvency ratios, debt ratios are around 0.2 and debt-equity is around 1.2, which shows that company’s assets and equities would be enough to fund shareholders money in case of company bankrupt on the long run in the worst case, otherwise would return good returns.

• Yes, from short term solvency ratios, current ratios are around 3, which is very good for short term investors.

What is the degree of risk inherent in the investment?

Financial risk is low as they are financed for assets from debts only for 20%. Their D-E ratios are quite low which reflects less risk.

Should existing investment holdings be liquidated?

Not at all, it is running very good CRs. In fact it is wasting some investments, instead it can do some more investments and generate more returns.

CONCLUSION

• Generally accepted accounting principles(GAAP) were adopted and practiced in both the firms Dr.Reddy’s and Cipla.

• Rupees depreciated by more than 14% as compared to US dollar and this has helped CIPLA and Dr.Reddy to achieve significant profit from exports.

• Dr. Reddy’s has EPS of 76.72 in 2012 whereas Cipla has EPS of only 14.25 and this is indicated in the net income as well where Reddy has increased its net revenues by 32% YoY whereas Cipla has managed to increase it by 12% YoY. However, market sentiment does not seem to appreciate this as P/E ratio for Dr. Reddy’s has come down from 26 to 22 and Cipla has come down by 25 to 22. Clearly the total liabilities is weighing them down.

• From the analysis we would not vote for both CIPLA and Dr Reddy’s. CIPLA would need further more analyzation based on their sudden shifts in reduction of liabilities and increase of assets. Dr Reddy’s is imposing financial risk on already existing business risk and hence we cannot predict the long term financial stability of the company, it depends on several external factors like economy of the country, industry competition, etc.